Life Protection

Life pro­tec­tion insur­ance is a life insur­ance policy that is designed to cov­er the insured for life. It pays a lump sum of money upon death, and about 5 install­ments of pay­out upon Total Per­man­ent Dis­ab­il­ity of the insured. Life insur­ance policy usu­ally also comes with Crit­ic­al Ill­ness cov­er­age that also pays a lump sum upon the dia­gnos­is of the covered crit­ic­al ill­ness defined by the insurer.

The fol­low­ing three types of life insur­ance are cur­rently sold in the mar­ket.

Type of Life Policy

Cov­er­age

Tra­di­tion­al Whole Life Policy

Whole life

Term Policy

Up to a spe­cified age, say 60

Invest­ment-linked Life Policy

As long as it is in-force

Whole life policy costs high­er com­pared to a term policy for the same sum insured. For invest­ment savvy people, it is good to buy the term policy to cov­er the required amount of sum assured for life and total per­man­ent dis­ab­il­ity. You may then chan­nel the remainder sum of premi­um saved in oth­er invest­ment that reaps returns of 4% and above. How­ever, it is still advis­able to buy at least one life policy that cov­ers you for life which also includes crit­ic­al ill­ness. This is to ensure we are inde­pend­ent and able take care of ourselves fin­an­cially at any stage of our life. The gen­er­al rule of thumb is to get insured for about 5 times your annu­al salary for crit­ic­al ill­ness and 7–10 times against death and total per­man­ent dis­ab­il­ity. How­ever, I think it is good to do a fin­an­cial needs ana­lys­is to get a bet­ter estim­ate of the insur­ance cov­er­age needed.

There are also two types of whole life policy,
• Lim­ited premi­um of a fixed num­ber of years, say 20
• Premi­um to be paid for life till age, say 85

The lim­ited premi­um only needs your com­mit­ment to pay for a fixed num­ber of years, say 20 years. How­ever, the cov­er­age will con­tin­ue for your entire life-time. Like­wise, nor­mal whole life policy will cov­er you for life but need to pay for a longer dur­a­tion till say age 85. The monthly lim­ited premi­um whole-life policy will be more expens­ive than the tra­di­tion­al whole life policy. How­ever, in the long run, you stand to save money since the pay­ment years is short­er. So the choice of the type of whole life policy really depends on your budget.

Whole life policy accu­mu­lates cash and bonus and is hence a par­ti­cip­at­ing policy. Term life policy is a non-par­ti­cip­at­ing policy since it does not attract any returns at the end of the policy. Also, the cov­er­age is nor­mally up till 60–70 years old, depend­ing on the offer by each insurer.

Invest­ment-linked life policy invests the premi­um col­lec­ted into the unit trusts offered by the insurer. It offers some cov­er­age of death and total per­man­ent dis­ab­il­ity up to about 5 times the annu­al premi­um or the value of your units, whichever is high­er. So, in a way, your cap­it­al invest­ment is in fact pro­tec­ted. You may need to add on riders to cov­er for the crit­ic­al ill­ness. The only caveat of this type of policy is that the cov­er­age ends when you sell away all the units in the invest­ment-linked policy. How­ever, it has the poten­tial of earn­ing a bet­ter returns based on Dol­lar Cost Aver­aging. How it works is to invest the same dol­lar amount in a fund at reg­u­lar inter­vals. The insured is able to cap­it­al­ize on mar­ket cycles by pur­chas­ing more units when prices are low and few­er units when prices are high. In the long term, the cost of each share is lower than the unit’s aver­age price dur­ing the same peri­od. And to max­im­ize the mar­ket cycle, we should pay the premi­um monthly instead of yearly.